Punitive taxes would discourage smokers from switching to a safer alternative, harming public health

Washington State and New Jersey are currently considering budget proposals that would impose additional taxes on e-cigarettes. These taxes would discourage smokers from switching, thereby ensuring that many more people continue to smoke cigarettes, which are far more harmful.

Washington State’s proposal, coming down to the wire amid the flurry of budget negotiations today and tomorrow in advance of the end of the legislative session on Thursday, would impose steep taxes in proportion to the nicotine level of vapor liquid. The premise, presumably, is that nicotine itself is harmful. But there is little evidence to support this premise. Meanwhile, heavy smokers require the high nicotine levels when they switch, so a tax that is proportional to nicotine levels would most discourage the very people who most need to switch.

The real reason for these taxes is to raise revenue. But both Washington State and New Jersey already impose sales taxes on e-cigarettes, e-liquids (the liquid “vaped” in e-cigarettes), batteries and other related products, so additional taxes seem disproportionate and punitive.

Yesterday, Erik Smith at Washington State Wire offered an excellent overview of the situation on the ground in Washington that’s well worth a read, as it is chock full of observations that highlight why the rush to tax e-cigarettes may satisfy the political appetite for ever more tax money to spend, but is ultimately:

counterproductive to public health;

unjust and unfair in its application; and

economically harmful to a rapidly growing market of entrepreneurs, manufacturers and retailers specializing in e-cigarette products.

Public Health

A recent authoritative review of 16 scientific studies of the impact of e-cigarettes in the Journal of Public Health Policy concluded that, “a preponderance of the available evidence shows [e-cigarettes] to be much safer than tobacco cigarettes and comparable in toxicity to conventional nicotine replacement products.” The article goes on to note that, “electronic cigarettes is not an alternative to smoking cessation, but rather a form of smoking cessation akin to long-term use of [nicotine replacement therapy].” (emphasis mine) And there is some evidence that e-cigarettes are at least as-if not more-effective than nicotine patches in terms of smoking cessation.

Meanwhile, former U.S. Surgeon General and anti-smoking advocate Richard Carmona recently warned the New York City Council that its attempt to extend the city smoking ban to e-cigarettes would “constitute a giant step backward in the effort to defeat tobacco smoking” and “send the unintended message to smokers that electronic cigarettes are as dangerous as [traditional cigarettes], with the result that many will simply continue to smoke their current toxic products.”

Similarly, the proposed tax on e-cigarettes would make them more expensive, undermining the incentives of smokers to quit. As such, it would discourage smokers from switching to e-cigarettes, which are far less harmful. In other words, it would harm the public’s health. Policymakers should be encouraging smokers to transition to safer products, such as e-cigarettes, not punish them for doing so by picking their pockets.

Unjust and Unfair

Currently, e-cigarettes are considerably less expensive than cigarettes, due to the very high taxes on cigarettes. Washington State proposes to tax nicotine at a rate of 8 cents per milligram, which could have the effect of doubling or tripling the cost of e-cigarette liquids, depending on the level of nicotine. As a result, the price of e-cigarettes would for many people be the same as cigarettes, as Erik Smith noted:

The big cost advantage that has encouraged thousands of ex-smokers to invest in costly “vaping” apparatus would be no more. There goes one of the biggest incentives to quit.

However, other nicotine products such as patches and gums-which contain the same active chemical (nicotine) as e-cigarettes-would be spared the tax. Why? Because they have been approved by the Food and Drug Administration as “smoking cessation products” (the FDA is still in the process of evaluating the regulatory treatment of e-cigarettes).

So what this means in practical terms is that Washington policymakers are proposing to selectively target one subset of non-tobacco nicotine users for tax hikes, simply because of the delivery method of said nicotine. Stick a patch on your arm to stop smoking, no problem. Inhale the nicotine in non-carcinogenic vapor that kind of looks like smoking…well then, you’d better pay up.

This differential application of taxation is bad tax policy, in addition to being a woefully misguided “sin tax” policy, as the Tax Foundation’s Lyman Stone recently pointed out. Overall, the proposed e-cigarette taxes appear to be an opportunistic cash grab, a cynical attempt to recapture tobacco tax revenues lost as smokers switch to safer alternatives like e-cigarettes. But this makes no sense, as Stone suggests:

The argument for tobacco [taxes] is that the smoking population imposes costs on the rest of society in the form of shared medical costs of entitlement programs, which are funded by taxpayers, and also in the form of second-hand smoke, which is a cost borne by anyone who walks into a smokey bar. […] Whatever the validity of those arguments, however, they have absolutely no application to e-cigarettes. E-cigarettes don’t cause damaging second-hand smoke and don’t include the harmful tar and chemicals that cause lung cancer. Insofar as they substitute for more damaging products, they may actually have positive externalities. Taxing e-cigarettes may make the people of Washington less healthy rather than more. If the relative price of e-cigarettes rises, fewer people will switch away from traditional cigarettes, which means more second-hand smoke and more lung cancer.

In other words, if the proposed e-cigarette taxes are meant to recapture tobacco taxes that would have eventually gone to public health spending to help cover the costs of the harmful impacts of smoking, then it would be illogical to impose a special tax on e-cigarette products because there is no health impact. Therefore, government would no longer need that revenue that is lost.

Business Effects

The e-cigarette market is gaining steam rapidly, with year-over-year sales doubling in 2013. One Wells Fargo market analyst projects e-cigarette sales to increase an average 38.1% annually in the coming years, rising from $1.5 billion today to over $45 billion in a decade.

What’s not seen in those numbers is a tremendous amount of other economic activity. For example, there’s the emergence of “vapor stores” where users can sample vapor liquids, purchase batteries for e-cigarette devices, and an array of accessory items (here’s a representative list of tax-paying businesses in Washington that did not exist a decade ago). These stores are already generating revenue for the state and local governments through sales taxes, business taxes, development permits and the like that would be squelched by pricing out a significant swath of their customer base through the imposition of punitive e-cigarette taxes. Many of these stores could face closure as a result, effectively nullifying the hard work of pioneering entrepreneurs in a vibrant, emerging market. Moreover, as Smith noted:

Should lawmakers impose a tax so punitive that it would wipe out the business just as it is taking hold? A business that seems to be accomplishing what generations of government anti-smoking campaigns have not? These are the kinds of questions that shouldn’t be decided in a rush, says [Washington State] Rep. Dick Muri, R-Steilacoom, one of the Legislature’s biggest vape-biz boosters. “This is more than a nice little tax,” he says. “This is a humungous tax. The power to tax is the power to destroy.

The prospect of destructive taxes has caught the attention of the Washington State vapor community. Over at Jonathan Turley’s blog, Darren Smith recently wrote:

According to KING5 News which reported on testimony before the legislature, many e-cigarette customers and retailers were worried their interests might be snuffed out by the legislature.

“I pay my taxes very happily, but I feel this bill to be asinine,” said Tammy Brookins, manager at Olympia’s Volcano Vapor Cafe.

She fears that essentially doubling the cost of her businesses products could put Volcano Vapor out of business. She also says it could scare cigarette smokers from converting to what she believes is a healthier alternative.

Hours of such testimony is available here. And the destructive impacts of e-cigarette taxation would not just hit the vapor store market, but would extend to convenience stores as well, as recently pointed out by Grover Norquist at Americans for Tax Reform.

Conclusion

It remains to be seen what will happen with the e-cigarette tax proposals in Washington State and New Jersey. But the rush to impose them is disheartening for those seeking to improve public health and reduce tobacco-related harms. In their zeal to slap heavy taxes on something that looks like smoking but isn’t-and is far less harmful-they would instead make it more likely that people would never switch in the first place.

Leonard Gilroy is director of government reform at Reason Foundation. Follow him on Twitter: @lengilroy